Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .63. It’s considering building a new $65.3 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.78 million in perpetuity. There are three financing options:
a. A new issue of common stock: The required return on the company’s new equity is 15.3 percent.
b. A new issue of 20-year bonds: If the company issues these new bonds at an annual coupon rate of 7.3 percent, they will sell at par.
c. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .12. (Assume there is no difference between the pretax and aftertax accounts payable cost.)
Required:
If the tax rate is 38 percent, what is the NPV of the new plant?